Economists say Hawaii in economic slowdown

Isle visitor growth is downgraded to 1%

The state reined in its economic forecast yesterday, but it did so amid characterizations of strength that made two leading economists uncomfortable.

In its latest quarterly report, the state Department of Business, Economic Development & Tourism said it has downgraded its forecast for visitor traffic to a 1 percent increase and visitor spending to a 3.3 percent gain, while raising its official estimate of inflation to 4.5 percent for the year.

"Based on our robust job growth and strong construction activities, we are confident in our economic growth projections for the next several years," said DBEDT Director Theodore E. Liu.

"The language is increasingly out of sync with the numbers," Brewbaker said.

Laney's take: "No boom and no expansion last forever."

The state's latest economic forecast is calling for solid growth, but the outlook for tourism and construction has been downgraded, while the official estimate of inflation has been raised.

Both figures have two leading local economists worried that the official optimism isn't supported by the economic reality.

In its quarterly report released yesterday, the state Department of Business, Econ- omic Development & Tourism said it has downgraded its forecast for visitor traffic to a 1 percent increase.

At the start of the year, DBEDT forecast arrivals would rise 1.4 percent to about 7.6 million in 2007. DBEDT has now forecast visitor spending will rise 3.3 percent this year, a drop of 1.5 percentage points from its earlier forecast.

Still, the state's economy has continued to expand in many sectors after several years of growth faster than the national average, said DBEDT Director Theodore E. Liu.

"Based on our robust job growth and strong construction activities, we are confident in our economic growth projections for the next several years," he said.

Inflation-adjusted personal income growth is forecast to be 1.8 percent in 2007 and 1.9 percent in 2008, DBEDT said. The Hawaii real gross domestic product is expected to increase 2.6 percent in 2007 and 2.5 percent in 2008. Total job growth, meanwhile, is expected to remain at 1.8 percent this year and 1.5 percent in 2008.

At the same time, a rise in energy prices and inflation has pushed the outlook for inflation in Honolulu to 4.5 percent this year -- 0.5 percentage points higher than in the previous forecast. In 2008, Honolulu prices are expected to rise 3.8 percent, 0.4 percentage points higher than in February.

While both figures would be a relief from the 2006 inflation rate, which the federal Bureau of Labor Statistics reported at 5.9 percent -- the biggest increase recorded in any U.S. city -- they have still taken their toll on economic growth, said Paul Brewbaker, chief economist for the Bank of Hawaii.

"The difficulty that we face looking at the outlook in Hawaii right now is that strong positive adjectives no longer align with the pace of real, inflation-adjusted economic activity," Brewbaker said. "The language is increasingly out of sync with the numbers, and part of the reason for the lack of synchronicity is that inflation has gotten so high that it turns positives into negatives in real terms."

Given the current economic climate, Brewbaker said he would characterize the economy as OK, but hardly solid as it has been touted by the state. For instance, visitor spending would have to grow more than 4.5 percent to yield a gain in real terms, he said.

"Not much here (in the visitor industry) has kept up with the pace of inflation," he said. "Note that unlike the people writing these press releases, we who are forecasting have not been trying to spin the message and we've still been too optimistic. So my reaction is that Aldous Huxley lives: Down is up, hate is love and war is peace."

Hawaii Pacific University economics professor Leroy Laney agreed with Brewbaker's assessment that while moderate growth is occurring, the state is in the throes of economic slowdown.

"No boom and no expansion last forever," he said, adding that Hawaii's economic indicators were far stronger in 2003, 2004 and 2005.

Hawaii's response to capacity constraints will determine economic growth and recovery in the future, Brewbaker said. The state needs to build more transient accommodations, expand transportation networks and address basic infrastructure and education needs, Brewbaker said. The private sector needs to build more industrial, office and warehouse space and invest in technology to compensate for labor shortages, he said.

Laney said if infrastructure is neglected, and that almost always happens in an expansion cycle, it becomes part of the process of slowing down.

"We could see a flatter economy for the next four to six years," he said. "The last boom cycle, which ran from the late 1980s to the early 1990s, was followed by a five-year hiatus."

The good news is that this downturn is expected to be less dramatic and Hawaii is far more prepared, Laney said.

"I don't think the economy is going to threaten many jobs around here," he said.